Prosper Australia

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MICHAEL HUDSON

Former Treasury Secretary Hank Paulson wrote an op-ed in The New York Times yesterday, February 16 outlining how to put the U.S. economy on rations. Not in those words, of course. Just the opposite: If the government hadn’t bailed out Wall Street’s bad loans, he claims, “unemployment could have exceeded the 25 per cent level of the Great Depression.” Without wealth at the top, there would be nothing to trickle down.

The reality, of course, is that bailing out casino capitalist speculators on the winning side of A.I.G.’s debt swaps and CDO derivatives didn’t save a single job. It certainly hasn’t lowered the economy’s debt overhead. But matters will soon improve, if Congress will dispel the present cloud of “uncertainty” as to whether any agency less friendly than the Federal Reserve might regulate the banks.

Paulson spelled out in step-by-step detail the strategy of “doing God’s work,” as his Goldman Sachs colleague Larry Blankfein sanctimoniously explained Adam Smith’s invisible hand. Now that pro-financial free-market doctrine is achieving the status of religion, I wonder whether this proposal violates the separation of church and state. Neoliberal economics may be a travesty of religion, but it is the closest thing to a Church that Americans have these days, replete with its Inquisition operating out of the universities of Chicago, Harvard and Columbia.

If the salvation is to give Wall Street a free hand, anathema is the proposed Consumer Financial Protection Agency intended to deter predatory behavior by mortgage lenders and credit-card issuers. The same day that Paulson’s op-ed appeared, the Financial Times published a report explaining that “Republicans say they are unconvinced that any regulator can even define systemic risk. … the whole concept is too vague for an immediate introduction of sweeping powers. …” Republican Senator Bob Corker from Tennessee was willing to join with the Democrats “to ensure ‘there is not some new roaming regulator out there … putting companies unbeknownst to them under its regime.”

Paulson uses the same argument: Because the instability extends not just to the banks but also to Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G. and Wall Street underwriters, it would be folly to try to regulate the banks alone! And because the financial sector is so far-flung and complex, it is best to leave everything deregulated. Indeed, there simply is no time to discuss what kind of regulation is appropriate, except for the Fed’s familiar protective hand: “delays are creating uncertainty, undermining the ability of financial institutions to increase lending to businesses of all sizes that want to invest and fuel our recovery.” So Paulson’s crocodile tears are all for the people. (Except that the banks are not lending at home, but are shoveling money out of the U.S. economy as fast as they can.)

As Obama’s chief of staff Rahm Emanuel put it, a crisis is too good a thing to waste. Having created the crisis, Wall Street wants to use its momentum to knock out any potential checks to its power. “No systemic risk regulator, no matter how powerful, can be relied on to see everything and prevent future problems,” Paulson explained. “That’s why our regulatory system must reinforce the responsibility of lenders, investors, borrowers and all market participants to analyze risk and make informed decisions,” In other words, blame the victims! The way to protect victims of predatory bank lending (and crooked sales of junk securities) is not new regulations but just the opposite: “to simplify the patchwork quilt of regulatory agencies and improve transparency so that consumers and investors can punish excesses through their own informed investing decisions.” Simplification means the Fed, not a Consumer Financial Protection Agency.

Moving in for the kill, Paulson explains that the Treasury is bare, having used $13 trillion to bail out high finance in 2008-09. So he warns the government not to run a Keynesian-type budget deficit. The federal budget should move into balance or even surplus, even if this accelerates the rise in unemployment and decline in wage levels as the economy moves deeper into recession and debt deflation. “We must also tackle what is by far our greatest economic challenge — the reduction of budget deficits — a big part of which will involve reforming our major entitlement programs: Medicare, Medicaid and Social Security.” The economy thus is to be sacrificed to Wall Street rather than reforming finance so that it serves the economy more productively. It is simple mathematics to see that if the government cannot raise taxes, it must scale back Social Security, other social welfare spending and infrastructure spending.

What is remarkably left out of account is that today’s financial crisis, centered on public debts, is largely a fiscal crisis in character. It is caused by replacing progressive taxation with regressive taxes, and above all by untaxing finance and real estate. Take the case of California, where tears are being shed over the dismantling of the once elite University of California system. Since American independence, education has been financed by the property tax. But Proposition 13 has “freed” property from taxation – so that its rental value can be borrowed against and turned into interest payments to banks. California’s real estate costs are just as high with its property taxes frozen, but the rising rental value of land has been paid to the banks – forcing the state to slash its fiscal budget or else raise taxes on labor and consumers.

The link between financial and fiscal crisis – and hence the need for a symbiotic fiscal-financial reform – is just as clear in Europe. The Greek government has pre-sold its tax revenues from roads and other infrastructure to Wall Street, leaving less future revenue to pay its public debt. To cap matters, paying income tax is almost voluntary for wealthy Greeks. Tax evasion is hardly necessary in the post-Soviet states, where property is hardly taxed at all. (The flat tax falls almost entirely on labor.)

Throughout the world, scaling back the 20th century’s legacy of progressive taxation and untaxing real estate and finance has led to a public debt crisis. Property income hitherto paid to governments is now paid to the banks. And although Wall Street has extracted $13 trillion in bailouts just since October 2008, the thought of raising taxes on wealth to pay just $1 trillion over an entire decade for Social Security or health insurance is deemed a crisis that would lead Wall Street to shut down the economy. It is telling governments to shift to a regressive tax system to make up the fiscal shortfall by raising taxes on labor and cutting back public spending on the economy at large. This is what is plunging economies from California to Greece and the Baltics into fiscal and financial crisis. Wall Street’s solution – to balance the budget by cutting back the government’s social contract and deregulating finance all the more – will shrink the economy and make the budget deficits even more severe.

Financial speculators no doubt will clean up on the turmoil.

Read more by our favourite contemporary author at www.michael-hudson.com

The Brumby government’s ill-fated Growth Areas Infrastructure Tax was defeated in the Victorian Senate last evening.

This spells the danger of poor land policy. Why did they attempt to charge $95,000 per hectare as a flat fee? Why wasn’t this infrastructure cost spread over a 20 year period as per traditional council bond funded infrastructure (repaid over time by the rating system – until neo-liberalism took over to undermine public finance)?

With developer’s squeezing at least 16 titles into each hectare, the per hectare land value would be worth approximately $4.5m (16 x $280,000). Even a more pessimistic price of $200,000 per possible title would deliver bucket loads to farmers.

Could farmers really look the people in the eye to say that they deserved to earn more in one foul swoop than they have over their entire life time?

The $95,000 per hectare flat tax was destined to cause controversy as it ignored those sites with access to nearby roads or services. This disadvantaged those farmers in poor locations, for which the media was made well aware of. Obviously, some sites would be more advantageous than others and so their land values would be higher.

Why didn’t the Brumby government communicate to MP’s and the public alike that firstly, huge millionaire windfalls would result from the re-zoning. With numbers please. Secondly, the naturally appreciating value of land.

Many criticisms would have been avoided if the government bond system of finance was repaid over the average 20 year lifetime of infrastructure by the landholders who benefited most from the new train stations etc.

As we show above, the $95K is minuscule compared to the land value per hectare post re-zoning. That’s barely 2% of the upkick. Worse yet, all this controversy for a GAIC that has been shown to only capture 15% of the projected infrastructure costs.

If the government was serious about financing such sprawl, it should implement a 10% land value capture policy on any re-zoned land. This will force the land to be used for it’s best and highest use (in this case housing). The farmer will still take home 90% of the windfall, but the public would receive some compensation for the privilege bestowed upon these landowners.

Readers of this site would understand that we would prefer to keep the 10% LVC charge in place and start removing stamp duty, payroll and the loophole ridden income tax. This would ensure that developers release all land to market asap, rather than drip feeding sites to the market over 18 years like Stockland have admitted at their Highlands sight in in Craigieburn. More positive spin offs can be seen here.

Who do rising property prices really benefit?

photo credit: Robbert van der Steeg

Surprise! A new Age survey found that investors were concerned about the Henry Review’s proposed Resource Rent Tax:

… a staggering 92 per cent believed that the higher taxes would hurt the share prices of resource stocks. Long-term effects were also considered, with 25 per cent believing that a resource rental tax was ’short-sighted’ and likely to ‘damage mining’ as an industry. More frightening was that 45 per cent of investors said the implications of the tax would make them rethink their investments in the sector.

These figures suggest significant support for a mining campaign against the tax, at least among those actively in the stock market. However, the miners have a big job ahead of them balancing this campaign against an already-widespread perception among investors that the tax is damaging to earnings. Too vigorous a response could increase risk-aversion significantly.

The miners have some room to move. When asked about how the government should deal with any resistance to the tax, 42 per cent of investors reckon authorities should ‘give in’ to miner demands. If the miners threatened to move offshore, 23 per cent said ‘let them go’. The results sounded one note of caution in that 36% of investors agreed the government should counter-threaten with nationalisation of assets. This figure is likely to be higher among the general population.
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It seems investors are keen to fashion Australia’s economy into a resources powerhouse – with all of the population increases that entails – but they don’t want to pay for it.

With this BRIC-led resource boom in full steam, a number of countries are charging over 70% in Resource Rents (Norway, Bolivia, Bahrain). Let’s hope the Rudd government can keep the public’s interest front and centre when the lobbyists knock on their door. Extraction should never be confused with production.

Please read our Dec – Jan edition of Progress (8MB), a special on Resource Rents.

photo credit: xeeliz

Our colleague Gavin Putland is quoted in this article by Leon Gettler:

Predicting when the property bubble will pop is bad for your mental health

PROPERTY bubbles suspend laws of supply and demand. In markets for widgets, demand goes down when the price goes up. With real estate, it’s the other way around. Higher prices lead to more demand as people seek to profit from the boom; property prices go up and potential buyers expect further increases, so they are willing to pay more. Maybe these laws are also inverted for other asset bubbles but the combination of leverage and low-priced finance leaves housing markets chronically vulnerable.

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Bubbles tipped to burst this year include China, gold, US Treasury bonds and, according to the Melbourne-based Land Values Research Group, Australian property.

LVRG director Gavin Putland puts it bluntly: “It’s months rather than a year, but how many months is hard to say because it’s so irrational and being irrational by definition makes it hard to predict. But reality must assert itself.”

If he is right, it will be a shock to many. In the late 1990s and early 2000s, the idea that homes and flats were fabulous investments took hold of the public imagination. Hence the frenzy. Newspapers in recent weeks have been fuelling the excitement, running pieces about half of Sydney’s home owners becoming millionaires by 2020 and sitting on a daily $766 average increase in the value of their properties.

The article ends with a shocker quoting Yale economist Robert Shiller:

Shiller says society needs mechanisms to let air out of property bubbles, something more than interest rates. These include home-equity insurance and new markets selling real estate futures with the potential to tame speculative bubbles.

So derivatives will save the day?!!! Short selling on an 18 year land cycle will do little to curb the boom busts. A tragedy that the history of economic thought has been watered down to such Junk Economics.

It’s hard to keep up with Professor Hudson’s rapid fire work rate. Wash the dishes to these 2 key interviews.

photo credit: Hyaground

Peter Martin, the journalist with the biggest sieve (catching all those Henry Tax report leaks), wrote recently on the LP’s highly secretive Ergas report:

The report proposes an annual land tax that would extend to the family home and would be used to fund the abolition of real estate stamp duty. ”It would be obvious nonsense to exclude the family home. It would create an unbearably low base.”

Company tax would be modeled on the resource rent tax that is presently in place for offshore petroleum and which the government’s Henry review recommends extending onshore.

Bryan Kavanagh stated:

So, we have a coalition report (the Ergas report) recommending a 20% flat income tax, plus a land tax which must include the family home, and the Henry Report that Glenn Milne initially inferred an across-the-board federal land tax, but which we’re assured by Peter Martin now excludes the family home.

With the GFC still raising it’s ugly head with recent sharemarket tremors, the need for other nations to review their tax system will no doubt continue. With the recent NZ tax review also recommending a greater role for land taxes in a highly mobile marketplace, our beliefs have never been more important.

If governments are serious about avoiding boom-busts, then the harnessing of the community created locational value of land (and other licensed monopolies) cannot be ignored. Billowing credit levels (as per helicopter Ben) will do little for the productive economy or sustainable growth. Resource Rents must be the prime revenue base for an economy concerned with reward for effort.

Read Hudson’s latest interpretation of Obama’s economic policies:

At stake now is President Obama’s credibility as an agent for change. Voters see his main “change” thus far to have been favoritism to Wall Street. Jay Leno jokes that Obama has done the impossible: resurrected the seemingly dying Republican Party and given it the coveted label of the “Party of Change,” running against Wall Street.

This is the political setting for what must certainly be a hastily rewritten State of the Union message. Instead of celebrating a Republican- and Lieberman-approved health care bill, Obama finds himself obliged to respond to voters who celebrated his first anniversary in office by choosing a Republican as their designated voice for change.

Those voters in Massachusetts last week who felt duped by Obama’s promise as a reform candidate did not really turn Republican, but obviously felt that at least they could throw out the Democrats for failing to make a credible start fixing the debt-strapped economy. The President has begged the banks to start lending again. But this means loading the economy down with yet more debt. The $13 trillion bailout was supposed to help them do this, but the banks have simply taken the money and run, paying it out in bonuses and salaries, stepping up their lobbying efforts to buy Congress, and buying out other banks to grow larger and increase their monopoly power.

Read More at Counterpunch

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With debate over the impact of China’s real estate bubble leading to a stock exchange ‘flu’ this week, moves are afoot as:

… today’s Beijing Youth Daily reports that the Ministry of Land and Resources recently released a list of 18 land development projects nationwide including five in Beijing that involved developers failing to develop their land timely.

The Ministry stated that it would urge developers to start development of the idle land. Those who failed to develop one year after bidding for development rights will face fines of up to 20 percent of the amount of their bids. If they still leave the land idle after two years, the land will be taken back by the government.

The logical conclusion from this statement is that land hoarding is ok if it is constantly rotated every 10 – 11 months. Whispers are that there are hoards of vacant apartments. These too are a loophole for speculative largesse. It seems that the CCP is willing to allow another class of mandarins or gentry to evolve:

The issue of land speculation has reached such zenith’s that influential blogger Patrick Chovanec reports:

The (TV) series “Dwelling Narrowness”, which aired on Beijing and Shanghai TV, focuses on the difficulties facing average Chinese people in an environment of spiraling apartment prices and official corruption.

The show was quickly pulled from the public airwaves for recensoring.
Wiki describes the past influence of the scholar – gentry:

Now known simply as landowners, they were criticized for demanding and collecting high rent from their tenants during the republican period. Many organized violent gangs to enforce their rule. They were frequent targets of the communists who were able to rally much of the peasant population through their promises of agrarian reform and land redistribution. After the People’s Republic of China was established, many landlords were executed by class struggle trials and the class as a whole was abolished. Former members were stigmatized and faced persecution which reached its heights during the Cultural Revolution. This persecution ended with the advent of Chinese economic reform under Deng Xiaoping.

In 2006, the Chinese rich list found that:

Seven of the 10 richest are property developers.

What would Sun Yet Sen say? He proposed the capturing of the windfall gains that accrue to property owners from the public’s productivity. This was a core issue in Sun Yat-Sen’s Three Principles of the People. Read more on Sun Yat-Sen’s influence.

Patrick Chovanec discussed the bubble on China Radio with the following key points:

• The main driver of mounting housing prices in China isn’t short-term speculation (“flipping”) but longer-term stockpiling of empty apartments as a “store of value,” like gold.
• If “flipping” were the main problem, we’d see a much more active secondary market. In fact, China’s secondary market is quite weak, suggesting that new housing is being stockpiled off-market and not being priced.
• This phenomenon is partly due to a limited range of other investment options, and partly due to low holding costs (my empahasis), particularly the absence of an annual property holding tax. Other holding costs, such as maintenance fees, can often be minimized or avoided entirely.
• Because it addresses the wrong problem, the government’s new tax on speculative “flipping” is unlikely to have much impact, and may actually make things worse by increasing the incentive to holder vacant property longer.
• Local governments in China depend on land sales for as much as 40% of their revenue, so have a keen interest in keeping prices high — in effect, a kind of “hidden tax.” The point of an annual property holding tax is not to increase the overall tax burden, but replace this revenue stream with a more rational and sustainable structure that rewards productivity.
• The so-called “affordability ratio” in China is sky-high. As a result, the unaffordable price of housing is already becoming a hot social issue in China

The flipping issue could be debated re this quote, which some could see as a sign that those ‘in-the-know’ are getting out:

Dec. 21, 2009 (China Knowledge) – Beijing’s second-hand apartment transaction volume was 19,861 units in the first half of this month, an amount 56.6% higher than the 12,680 units that changed hands in the same period of last month, sources reported. About 1.88 million square meters of second-hand apartments changed hands, compared with 1.19 million in the first half of October.

Sun Yat-Sen would be fuming at the formation of a new generation of gentry. As Patrick describes above, the ‘flipping tax’ (which seems to be akin to our stamp duties), impedes the turnover of property. Turnover taxes like this do accentuate hoarding for greater periods until the desired profit is delivered.

A Land Value Tax or Site Rental on all land would ensure that both flipping and hoarding are discouraged.

Perhaps 2010 will be defined by the economic leadership of China, especially as Professor Michael Hudson has recently visited China and inspired deeper thinking on this core issue.

photo credit: kevindooley

Michael Hudson

Originally posted at Counter Punch

Paul Samuelson, America’s best known economist, died on Sunday Dec 13th. He was awarded the Nobel prize for economics, (founded one year earlier by a Swedish bank in 1970 “in honor of Alfred Nobel”). That award elicited this trenchant critique, published by Michael Hudson in Commonweal, December 18, 1970. The essay was titled “Does economics deserve a Nobel prize? (And by the way, does Samuelson deserve one?)”

It is bad enough that the field of psychology has for so long been a non-social science, viewing the motive forces of personality as deriving from internal psychic experiences rather than from man’s interaction with his social setting. Similarly in the field of economics: since its “utilitarian” revolution about a century ago, this discipline has also abandoned its analysis of the objective world and its political, economic productive relations in favor of more introverted, utilitarian and welfare-oriented norms. Moral speculations concerning mathematical psychics have come to displace the once-social science of political economy.

To a large extent the discipline’s revolt against British classical political economy was a reaction against Marxism, which represented the logical culmination of classical Ricardian economics and its paramount emphasis on the conditions of production. Following the counter-revolution, the motive force of economic behavior came to be viewed as stemming from man’s wants rather than from his productive capacities, organization of production, and the social relations that followed therefrom. By the postwar period the anti-classical revolution (curiously termed neo-classical by its participants) had carried the day. Its major textbook of indoctrination was Paul Samuelson’s Economics.

Today, virtually all established economists are products of this anti-classical revolution, which I myself am tempted to call a revolution against economic analysis per se. The established practitioners of economics are uniformly negligent of the social preconditions and consequences of man’s economic activity. In this lies their shortcoming, as well as that of the newly-instituted Economics Prize granted by the Swedish Academy: at least for the next decade it must perforce remain a prize for non-economics, or at best superfluous economics. Should it therefore be given at all?

This is only the second year in which the Economics prize has been awarded, and the first time it has been granted to a single individual — Paul Samuelson — described in the words of a jubilant New York Times editorial as “the world’s greatest pure economic theorist.” And yet the body of doctrine that Samuelson espouses is one of the major reasons why economics students enrolled in the nation’s colleges have been declining in number. For they are, I am glad to say, appalled at the irrelevant nature of the discipline as it is now taught, impatient with its inability to describe the problems which plague the world in which they live, and increasingly resentful of its explaining away the most apparent problems which first attracted them to the subject.

The trouble with the Nobel Award is not so much its choice of man (although I shall have more to say later as to the implications of the choice of Samuelson), but its designation of economics as a scientific field worthy of receiving a Nobel prize at all. In the prize committee’s words, Mr. Samuelson received the award for the “scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science. . . .”

What is the nature of this science? Can it be “scientific” to promulgate theories that do not describe economic reality as it unfolds in its historical context, and which lead to economic imbalance when applied? Is economics really an applied science at all? Of course it is implemented in practice, but with a noteworthy lack of success in recent years on the part of all the major economic schools, from the post-Keynesians to the monetarists.
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The plot thickens with Glenn Milne reporting

THE Federal Government’s biggest tax inquiry in more than two decades is set to propose a national land tax, a new resource tax and a congestion tax for clogged cities.

The Henry Review, by Treasury head Ken Henry, is also expected to canvass a federal clawback of GST revenues, which now go entirely to the states, to fund the Government’s proposed takeover of the public hospital system.

Dr Henry’s report, due at the end of the month, is also believed to favour a national payroll tax to replace the state system.

One of its controversial proposals is for a national land tax to replace state-based stamp duties payable on the sale of homes and investment properties.

A national land tax would open up the Government to claims of taxing the family home. But it could mean big savings for many Victorians – for houses priced $550,000 and under Victorian homebuyers pay $14,370 more in stamp duty than Queenslanders.

There are many other advantages of a move towards a Land Tax, especially the signal it sends our bloated property market that land speculation is a destructive practice. Such a replacement of stamp duties will remove an impediment to property turnover, helping the market reach a truer price discovery. The efficiency gains this will deliver are undeniable amongst independent economists.

With foreign investment in property growing, having a uniform Land Tax rate will assist the people in sharing from the ever increasing value of land. It also signals in a globalised world where capital is just so mobile, that a Land Tax is the fairest way to ensure that all pay their fair share. Wealth cannot be off-shored under this system.

The move towards a resource rent tax on mining companies is another admission that the earth’s scarce resources are part of our common wealth. Why should workers be taxed so that the privileged can make money in their sleep through resource speculation and hoarding? Check some of our recent tax submissions.

An interesting Christmas break to come…